Saturday, May 24, 2008

In Asia, 'E' Is Now Back in PE Equation

Found this article dated 2000. With the subprime crisis, oil prices, inflation.. perhaps now again is the time where Earnings should be the focus for investors when looking for Singapore shares.

By Thomas Crampton Published: SATURDAY, MAY 27, 2000

FOR THE LAST few years, investors aiming for companies with single-digit price-to-earnings ratios would search most Asian markets in vain.

Stock prices fell precipitously during the region's economic crisis and almost no companies had the "E" — earnings — to plug into the PE equation.

While this remains true in cases like the money-losing Thai banking sector, PE ratios now come in all varieties: from an average of about 20 on the Singapore Straits Times Index to just above 10 on Hong Kong's Hang Seng index to 142 on Japan's Nikkei 225.

The economic recovery under way in almost all Asian markets has brought back earnings and, with them, the usefulness of PE ratios, according to Ian Gisbourne, the Hong Kong-based regional equity market strategist for Credit Suisse First Boston.

"As profits return, I think the price-to-earnings ratio is becoming a more useful way to look at Asian stocks," Mr. Gisbourne said. "The danger now is that some stocks have had the earnings already factored into the price."

"Investors should not just go for the cheapest earnings multiple, but choose a basket of companies and then sort through which earnings projections they think most realistically achievable," Mr. Gisbourne said. "Many analysts currently predict earnings with very high expectations."

While many stocks are within the investment criterion of a PE ratio below 10, not many among them are in the fast-growing industries preferred by Anand Aithal, the Singapore-based chief Asian equity strategist for Goldman Sachs.

"Technology and telecom stocks have been driving the market down as they fall from 100 times earnings to 50 times earnings," Mr. Aithal said. "But you just will not find the absolute cheapness like you did in the middle of the crisis."

As Asian companies sort through paying back their mountains of foreign debt, however, investors may prefer to buy bonds. Credit rescheduling usually requires companies to pay back money they borrowed before issuing dividends to shareholders. The risk — the possibility of default — is balanced by the reward of returns above 10 percent for sovereign-backed bonds.

The bad news for retail investors is that Asia's bond market is now mostly a game for the big boys. The region's over-the-counter bond market is dominated by brokers and investors who are usually required to commit at least dollars 100,000 per transaction and must work through a handful of regional investment banks.

Like many industries, the Internet is starting to crack open the clubby atmosphere of bond investing. Sites to consult include and

While many Asian corporate bonds can offer yields above 10 percent, U.S. dollar investors should stick with government-backed bonds, warned the Hong Kong-based head of institutional sales at one major regional investment bank.

"If you have to put money into U.S. dollar-denominated debt Asia, we recommend it to be sovereign or sovereign related," said the investment banker, who asked not to be identified. "Outside of the sovereign, we feel the rewards are just not enough."

The banker pointed to the Indonesian 2006 bond and cited the Philippines 2010 bond as a particularly good investment.

"The Philippines bond now yields above 12 percent, but we are relatively comfortable with the country's credit risk," the banker said.

Local government bonds should not be entirely overlooked, according to Hsin-Li Chia, a Singapore-based regional market research analyst at J.P. Morgan.

"It is true that many of the local markets are quite illiquid," Ms. Chia said. "But you can find high yields in India and the Philippines."

Sanjeev Gupta, associate director for Asian credit research at UBS Warburg, suggests investigating bond opportunities in South Korea, the Philippines and Indonesia.

"These high-yield markets now offer some attractive opportunities," he said. "They are not low-risk category investments, but we think there are some companies that have undergone significant improvements."

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